Exelon’s nuclear bailout dream scheme

After a year of making us wait with bated breath, last week Exelon unveiled its proposals for the energy future. And man, is it anti-climactic. And anti-CLIMATIC, actually. The long and the short of it is that Exelon is proposing that the state of Illinois and energy regulators at every level create new ways to subsidize the company’s old nuclear plants, to the tune of a billion dollars a year or more, while undermining real climate solutions. This is exactly what we expected all along, but until this week, Exelon had talked mostly in platitudes about how “under-valued” its nuclear gems are by “dysfunctional” markets and “unfair” renewable energy programs. Well, now the cards are on the table and we know what Exelon thinks it will take to stop the nuclear industry from backsliding into an economic phaseout.

First, a review of how we got here. Exelon kicked off last year by issuing threats to Illinois lawmakers that it would have to close, first, three and, later, five reactors in the state if the legislature did not shore up their bottom lines with some sort of ongoing financial assistance. That created a minor political crisis, with legislators scrambling to figure out how to prevent job losses and local government bankruptcies. Then, Exelon rolled out a multi-million-dollar front operation under the banner of Nuclear Matters, run by its PR firm (Sloane and Co.) and hiring a growing roster of former senators and White House officials as its spokespeople. Exelon’s gambit soon became clear: it wanted to prevent a bill to fix Illinois’s renewable energy programs from moving forward, and make sure its nukes came first. It brokered a deal with legislative leaders to kill the renewable energy bill in exchange for not closing any reactors for a year.

Then, Exelon got the Illinois House of Representatives to ram through a resolution, HR 1146, promoting Exelon’s whole agenda and requiring state agencies to produce studies and proposals for how to “preserve” the state’s nuclear plants. In the fall, Exelon urged the agencies to misapply the U.S. EPA’s proposed carbon emissions regulation, to the tune of $580 million per year in new subsidies. It later reiterated the call, even after having successfully pushed new energy market rules estimated to return $560 million/year in new revenue for its Illinois reactors. In total, it appeared that Exelon was angling for a total of over $1 billion/year, enough to raise the average price of electricity by 38% statewide–and the total delivered cost of electricity by 22%. Exelon didn’t exactly try to dispel the “perception.”

And as it turns out, perception was not far off the mark. In fact, it may have undershot the mark. Here’s what is now on the table:

New Capacity Market rule ($500-$600 million/year): Most of Exelon’s reactors are in the country’s largest regional electricity market. Called PJM because it originally encompassed Pennsylvania, New Jersey, and Maryland (plus Delaware), it now stretches out to the Midwest, including much of Illinois where Exelon’s utility, transmission lines, and most of its nuclear plants are. PJM like other regional grid operators runs markets for different energy products and “services.” The wholesale market–for actual electricity–is where most of the action is at. And after that is the “installed capacity” market (ICAP). That is where power plants are paid for promises to be online at a future date, to make sure there will be enough generating capacity to meet electricity demand.

In the fall, Exelon urged PJM to adopt new ICAP market rules to “value” nuclear and coal plants with higher revenues, by restricting eligibility for the auctions to exclude or discourage some plants from bidding and stiffening penalties for plants that turn out not to be available when called upon. PJM agreed, adopting Exelon’s proposal over others proposed by environmental and consumer advocates, renewable energy trade groups, and customer-minded utilities. If approved by the Federal Energy Regulatory Commission, the final arbiter in electricity markets throughout the country, Exelon is expected to see a $560 million windfall beginning in 2018 for its ten PJM reactors in Illinois. In addition, Exelon owns all or part of ten other reactors in PJM, bringing the total haul–and the bill to PJM electricity customers–to more than $1 billion per year. FERC will decide in the coming months whether to approve the new rules.

FERC Carbon Tax Rule ($500 million-$1 billion/year): Two weeks ago, Exelon made a presentation to FERC on how the EPA’s carbon emission regulation (the Clean Power Plan) should be implemented. Calling the policy “Reliability Dispatch Safe Harbor” (or RDSH), Exelon essentially is proposing that ratepayers–not fossil fuel companies–pay a carbon tax directly to nuclear plants. We can decode the strange name of the proposal this way:

• “Reliability” refers to the generation sources Exelon thinks worth preserving, namely nuclear and fossil fuels. Exelon’s presentation was oddly silent on where renewable energy and conservation fit in.

• “Dispatch” refers to the way market auctions determine which power plants will be required to operate, or what is referred to as the “dispatch” order. Market auctions establish a “clearing price,” and plants that bid in higher than that price are not accepted, and therefore are not dispatched. Under Exelon’s proposal, fossil fuel plants would have a carbon tax rate added to the price they bid into wholesale market auctions based on their carbon emissions rate. Ostensibly, the practice would ensure that coal plants dispatch less often and natural gas plants more often, because coal plants’ CO2 emissions rates are generally higher. However, natural gas is already generally cheaper than coal–and therefore clears auctions and dispatches ahead of coal, anyway–so it’s not clear the rule would have any effect in reality.

• “Safe Harbor” refers to states’ compliance with the EPA’s emissions standards under the Clean Power Plan (CPP). Under Exelon’s scheme, states that adopt the policy would be exempted from any of the EPA’s emissions benchmarks. Exelon is betting that such ease of compliance would entice a number of states–particularly those unhappy with the CPP–to simply opt into Exelon’s scheme. Ostensibly, states could begin implementing the program between 2018-2020, with an incentive for doing so as soon as possible.

In practice, the RDSH version of a carbon tax would simply increase market auction prices, on top of the operating cost of fossil fuel plants. Fossil fuel plants would be paid the market price minus their carbon tax rates. Utilities would be rebated the tax revenues not paid to the fossil fuel plants, and could either distribute those funds to customers or invest them in renewable energy and/or efficiency. Nuclear plants would be paid the full auction clearing price, including the carbon tax rate, and would be the big winners.

In Exelon’s presentation to FERC, it used a hypothetical auction in which nuclear, coal and gas plants all bid in, the coal plants were rejected, and nuclear plants earned extra revenue based on the natural gas plants’ carbon tax rate of $6.6 per megawatt-hour (MWh). In such a scenario, Exelon’s Illinois reactors would stand to earn an extra $600 million/year, a bit more than what it urged the state to guarantee in Fall 2014. However, because more often than not, some coal would clear the auction and therefore raise the market price even higher (due to their higher carbon tax rate), nuclear plants could see a much greater windfall. In the example Exelon gives, if even one coal plant cleared the auction, nuclear plants would benefit nearly twice as much, at a rate of $12.8/MWh–or nearly $1.2 billion per year.

Low-Carbon Energy Credits ($300 million/year): Now to Exelon’s Illinois proposal. In legislation unveiled last week, Exelon is proposing the creation of a special funding mechanism for “low-carbon” energy sources, in addition to the state’s existing renewable energy standard and “clean coal” standard. The state’s two large utilities–Ameren Illinois and Exelon’s Commonwealth Edison–would have to purchase low-carbon energy credits (LCECs) from qualifying power plants, amounting to 70% of their total electricity sales, beginning in 2016.

As Crain’s Chicago Business pointed out Thursday, it just so happens that Exelon’s Illinois reactors generate just about exactly that much electricity. What’s more, the definition of what qualifies as “low-carbon energy” is set up to make sure almost nothing but nuclear passes the test:
• Only small hydropower plants (less than 3 megawatts), which is an utterly inconsistent distinction.
• No power sources with contracts of five years or more, disqualifying most wind and other renewable energy generators.
• There are no “clean coal” plants in operation, and the one such plant Illinois’s clean coal standard was established to support was recently cancelled.

The LCECs are likely to be worth about $300 million per year, and would be available until at least 2021. There is also virtually no incentive for the other energy sources to seek the low-carbon credits. While, in total, they would be worth more than renewable energy credits (about $200 million/year), RECs are divided up among a much smaller piece of the energy pie (10-15% of electricity sales vs. 70%), so each wind farm and solar plant would still earn proportionally more from renewable energy credits. Furthermore, Exelon’s proposed bill would not fix the flaws in the existing law, so Illinois would continue to face the same problems that currently exist that limit renewable energy development. Similarly, the same $300 million worth of “clean coal” credits would apply to a plant/s only representing 5% of the electricity supply.

So nuclear really wouldn’t have any competition to sell low-carbon credits, and would have a corner on the entire “market.” This is going to be an uncomfortable thing for Exelon to defend. For a year now, the company has protested any characterization of its objectives as subsidies or bailouts, insisting it is seeking “market-based” solutions. A “market” in which only one company and one technology can participate–and in which it is both the sole seller and the majority buyer–is uncompetitive by definition. It would at least be more honest for Exelon to propose a simple flat subsidy for nuclear plants.

Adding it all up: These proposals would phase in and overlap at different times over the next several years, and could amount to over $1.5 billion/year at the peak and total over $6 billion by 2022. Here is a rough “calendar” for how the scheme could play out:

2016-2017:   LCEC                                             $300 million
2018-2020:   LCEC + ICAP + RDSH                  $1.2-$1.9 billion/year
2021:             LCEC (½-year) + ICAP + RDSH   $1.1-$1.6 billion
2022+:           ICAP + RDSH                               $1.0-$1.5 billion/year
TOTAL (2016-2022)                                         $6.3-$9.4 billion

Everyone from apartment renters to local governments to small businesses to large manufacturers is not going to care whether it’s called subsidies, bailouts, “market-based solutions,” or a giant hairball. The net effect would be that Illinois utility customers could see their utility bills go up substantially over the next several years, primarily to subsidize Exelon’s nuclear fleet, and with no solution to the fundamental problems limiting renewable energy development. In 2014, wind farms in the Midwest were signing contracts to deliver electricity for 2.5 cents per kilowatt-hour–less than the market price of electricity–yet Exelon’s scheme would force people to pay substantially more for nuclear-generated electricity.

So, as we mentioned Friday, the Illinois legislature’s session runs through May. It has to consider Exelon’s proposal, and an alternative proposal submitted by the Clean Jobs Coalition–a broad coalition ranging from AARP to Chicago Mayor Rahm Emanuel to just about all of the state’s environmental and clean energy organizations–that would expand the state’s Renewable Energy Standard and create far more jobs at far less cost to ratepayers than would be lost by closing Exelon’s uneconomic, aging, dirty reactors. The choice is pretty clear; the question is which side has the political power.

Tim Judson

March 2, 2015

Permalink: https://www.nirs.org/2015/03/02/exelons-nuclear-bailout-dream-scheme/

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